(55) DEPARTMENT OF COMMERCE
Patent and Trademark Office
[Docket No.: PTO-P-2006-0034]
Business Size Standard for Purposes of
United States Patent and Trademark Office
Regulatory Flexibility Analysis for
Patent-Related Regulations
AGENCY: United States Patent and Trademark Office, Commerce.
ACTION: Notice.
SUMMARY: The Regulatory Flexibility Act permits an agency head to
establish, for purposes of Regulatory Flexibility Act analysis and
certification, one or more definitions of "small business concern" that are
appropriate to the activities of the agency. Pursuant to this authority,
the United States Patent and Trademark Office (USPTO) is establishing the
Small Business Administration (SBA) business size standard for the purpose
of paying reduced patent fees as the size standard for conducting an
analysis or making a certification under the Regulatory Flexibility Act for
patent-related regulations.
DATES: Effective Date: November 20, 2006.
FOR FURTHER INFORMATION CONTACT: Christina T. Donnell, Senior Petitions
Attorney, Office of Petitions, Office of the Deputy Commissioner for
Patent Examination Policy, by telephone at (571) 272-3211, by mail
addressed to: Mail Stop Comments--Patents, Commissioner for Patents,
P.O. Box 1450, Alexandria, VA, 22313-1450, or by facsimile to (571)
273-7735, marked to the attention of Christina T. Donnell.
SUPPLEMENTARY INFORMATION: The USPTO is in this notice establishing the SBA
business size standard for the purpose of paying reduced patent fees as the
size standard for conducting an analysis or making a certification under
the Regulatory Flexibility Act for patent-related regulations. The USPTO is
not changing or proposing to change the definition of small entity for the
purpose of paying reduced patent fees.
The patent statute provides that "[f]ees charged under [35 U.S.C.
41](a), (b) and (d)(1) shall be reduced by 50 percent with respect to their
application to any small business concern as defined under section 3 of the
Small Business Act, and to any independent inventor or nonprofit
organization as defined in regulations issued by the Director." 35 U.S.C.
41(h)(1). The SBA defines a small business concern for the purpose of
paying reduced patent fees as one: "(a) Whose number of employees,
including affiliates, does not exceed 500 persons; and (b) Which has not
assigned, granted, conveyed, or licensed (and is under no obligation to do
so) any rights in the invention to any person who made it and could not be
classified as an independent inventor, or to any concern which would not
qualify as a non-profit organization or a small business concern under this
section." 13 CFR 121.802.
The USPTO uses the SBA business size standard for the purpose of paying
reduced patent fees in 13 CFR 121.802 as the size standard when conducting
an analysis or making a certification under the Regulatory Flexibility Act
for patent-related regulations. See e.g., Changes To Support Implementation
of the United States Patent and Trademark Office 21st Century Strategic
Plan, 69 FR 56481, 56530 (Sept. 21, 2004) (discussion indicating that small
entities for purposes of the Regulatory Flexibility Act are considered a
subset of the small entities for purposes of paying reduced patent fees).
The USPTO has no business need (other than to conduct an analysis or make a
certification under the Regulatory Flexibility Act) to collect information
from patentees and patent applicants concerning whether they are a small
business concern using the business size standards set forth in 13 CFR

121.201. Thus, the USPTO uses the SBA business size standard set forth in
13 CFR 121.802 as its size standard when conducting an analysis or making a
certification under the Regulatory Flexibility Act to avoid the need to
gather data from patentees and patent applicants as to whether they are a
small business concern as described in 13 CFR 121.201.
Comments and Responses: Pursuant to the Regulatory Flexibility Act, the
USPTO consulted with SBA Advocacy and published a request for comments on
the establishment of a business size standard (the business size standard
set forth in 13 CFR 121.802 for the purpose of paying reduced patent fees)
for the purpose of USPTO Regulatory Flexibility Analysis for patent-related
regulations. See Size Standard for Purposes of United States Patent and
Trademark Office Regulatory Flexibility Analysis for Patent-Related
Regulations, 71 FR 38388 (July 6, 2006), 1309 Off. Gaz. Pat. Office 37
(Aug. 1, 2006) (request for comments). SBA Advocacy convened a regulatory
roundtable to discuss the USPTO's proposed business size standard (attended
by USPTO representatives) on July 19, 2006, and the USPTO received seven
written comments (from SBA Advocacy, the Professional Inventors Alliance,
and five individuals) in response to the request for comments. The comments
and responses to the comments follow:
Comment 1: SBA Advocacy commented, in pertinent part, that:
On July 19, 2006, Advocacy convened a regulatory roundtable to discuss
the USPTO's proposed size standard. Participants at the roundtable included
industry personnel representing the interests of small businesses and
independent inventors, USPTO personnel, representatives from the SBA Office
of Size Standards, and Advocacy. During the roundtable, small entity
representatives expressed reservations about the proposed size standard.
They indicated that the standard would exclude a significant number of
small entities. Further, they were concerned that the standard would not
provide an accurate estimate of the number of small entities affected by
the USPTO's regulations.
Currently, patent applicants must claim small entity status by checking
a box on their patent application. However, small entity representatives
informed Advocacy that entities often choose not to claim small entity
status for a variety of reasons. USPTO data systems track the number of
patent applications that claim small entity status. The agency then uses
the numbers to estimate the number of small entities affected by its
rulemakings. The agency does not collect data on or count the specific
entities that are submitting a patent application. As a result, the data
collected by the USPTO does not provide an accurate estimate of the number
of small entities affected by the agency's rules. Since the proposed size
standard only tabulates the number of applicants claiming small entity
status, and not actual small entities, Advocacy does not believe that it is
the appropriate size standard for [Regulatory Flexibility Act] purposes.
Advocacy appreciates the USPTO's challenge in identifying an appropriate
size standard for [Regulatory Flexibility Act] purposes. We agree with the
agency's decision to request public comment on the proposed size standard.
However, we urge the USPTO not to adopt a size standard that would
adversely affect small entities. The proposed standard will not facilitate
the USPTO's compliance with the [Regulatory Flexibility Act] since it will
not adequately estimate the small entities affected by the agency's
regulations. Advocacy suggests that the agency continue to work with our
office to identify a more appropriate standard after reviewing public
comments on the proposal.
Another individual comment also objected to the use of the SBA business
size standard in 13 CFR 121.802 as the size standard when conducting an
analysis or making a certification under the Regulatory Flexibility Act for
patent-related regulations. The comment asserted that it was not unusual
for a small business concern to file as a large entity to avoid the
possibility of the patent being subsequently invalidated because of an
improper assertion of small entity status. Additionally, the comment

asserted that the number of small business concerns affected by the USPTO's
rule making is much greater than the number of small entity applicants
assessed by the USPTO. Alternatively, several individual comments supported
the USPTO's definition of small business concern for Regulatory Flexibility
Act purposes.
Response: The USPTO does not consider the arguments that it
significantly undercounts the number of small entities affected by its rule
makings to be persuasive. On July 19, 2006, representatives from the USPTO
attended SBA Advocacy's roundtable and met with representatives from the
SBA, SBA Advocacy, the Intellectual Property Owners Association, the
Association for Competitive Technology, the American Intellectual Property
Law Association, and the United Inventors Association. The USPTO received
anecdotal feedback at the SBA Advocacy roundtable that the USPTO
significantly undercounts the number of small entities affected by its rule
makings when the USPTO relies upon the small entity data as contained in
the USPTO's Patent Application Locating and Monitoring (PALM) system. The
USPTO, however, has not been provided with any data or other specific
information to substantiate this anecdotal information. In addition, none
of the groups whose representatives were present at the SBA Advocacy
roundtable (except for SBA Advocacy) submitted a comment in response to the
USPTO's request for comments on the USPTO's definition of small business
concern for Regulatory Flexibility Act purposes. In support of the
contention that the small entity data in PALM significantly undercounts the
number of small entities, the representatives at the SBA Advocacy
roundtable and the comments asserted that small entities routinely decline
to claim small entity status because: (1) Applicants must claim small
entity status by checking a box on a particular USPTO form; (2) small
entities consider the fifty percent reduction in patent fees negligible
relative to the overall cost of obtaining a patent; and (3) there are
negative legal consequences if small entity status is claimed or is claimed
improperly.
The small entity data contained in the PALM system is collected from
patent applicants on the basis of whether the applicant claims small
entity status for the purpose of paying patent fees. Section 4502(b) of the
American Inventors Protection Act of 1999 (AIPA) charged the Government
Accountability Office (GAO) with conducting a study of the impact of the
AIPA's eighteen-month publication provisions, which included a study of any
correlation of the status of the applicant (small entity or non-small
entity) and the eighteen-month publication of applications. See Public Law
106-113, 113 Stat. 1501, 1501A-552-53 (1999). The GAO analyzed the data in
the USPTO's PALM system and deemed it sufficiently reliable for purposes of
conducting the study mandated by the AIPA. See Information about the
Publication Provisions of the American Inventors Protection Act, GAO-04-603
at 14-15 (2004).
The USPTO representatives indicated at the SBA Advocacy roundtable that
to collect small entity data with the reliability being urged by SBA
Advocacy (or of greater reliability than is currently contained in the
USPTO's PALM system) would compel the USPTO to require all patent
applicants to affirmatively state whether they are or are not a small
entity. No party present at the SBA Advocacy roundtable advocated the
adoption of such a requirement. In addition, the SBA Advocacy comment does
not suggest any viable alternative to the USPTO's reliance upon the data on
small entities contained in the USPTO's PALM system for Regulatory
Flexibility Act analysis or certification purposes. Therefore, the USPTO
considers the data on small entities in the USPTO's PALM system to be
sufficiently reliable (especially in light of the absence of any viable
preferable alternatives) for use in conducting an analysis or making a
certification under the Regulatory Flexibility Act for patent-related
regulations.
The statement that patent applicants must claim small entity status by
checking a box on a particular USPTO form is not correct. The USPTO revised
37 CFR 1.27 in September of 2000 to provide that patent applicants may

claim small entity status by: (1) Providing a written assertion of
entitlement to small entity status (37 CFR 1.27(c)(1)); or (2) paying the
basic filing or basic national fee in the small entity amount (37 CFR
1.27(c)(3)). See Changes to Implement the Patent Business Goals, 65 FR
64603, 54609-15, 54659-61 (Sept. 8, 2000) (final rule). The USPTO includes
a box next to a written assertion of entitlement to small entity status on
its application transmittal form, which patent applicants may use to claim
small entity status when filing a patent application (37 CFR 1.27(c)(1)).
The USPTO, however, does not require applicants to check this box on the
application transmittal form (or even use the application transmittal form)
to claim small entity status. Therefore, the USPTO does not believe that
small entities routinely decline to claim small entity status due to the
USPTO's requirements for establishing small entity status.
The argument that small entities consider the fifty percent reduction in
patent fees to be negligible is likewise unpersuasive. As introduced and
reported out of the House Committee on the Judiciary, the United States
Patent and Trademark Fee Modernization Act of 2003 did not contain a small
entity reduction for the patent search fee. See The United States Patent
and Trademark Fee Modernization Act of 2003, H.R. 1561, 109th Cong., Sec.
2 (2003). During the floor debate on the United States Patent and Trademark
Fee Modernization Act, the following amendments were necessary to address
small entity concerns and secure passage of this legislation by the House
of Representatives: (1) A fifty percent reduction in the patent search fee
for small entities; (2) a seventy-five percent reduction in the patent
filing fee for small entities who file electronically; and (3) a study of
the effects of patent fees on the ability of small entities to file patent
applications. See United States Patent and Trademark Fee Modernization Act
of 2004, 150 Cong. Rec. H793, H803 (daily ed. Mar. 3, 2004) (floor debate
and passage of United States Patent and Trademark Fee Modernization Act of
2004 by the House of Representatives). The USPTO does not believe that
small entities would have sought these changes to the United States Patent
and Trademark Fee Modernization Act of 2004 if a substantial number of
small entities considered the fifty percent reduction in patent fees to be
negligible.
The argument concerning negative legal consequences if small entity
status is claimed or is claimed improperly is similarly not persuasive. The
rules of practice provide that: "[i]f status as a small entity is
established in good faith, and fees as a small entity are paid in good
faith, in any application or patent, and it is later discovered that such
status as a small entity was established in error, or that through error
the Office was not notified of a loss of entitlement to small entity status
as required by Sec. 1.27(g)(2), the error will be excused upon compliance
with the [requirements of 37 CFR 1.28(c)]." 37 CFR 1.28(c). In the
mid-1990s, there were District Court decisions in which a patentee faced
negative legal consequences for erroneously or improperly claiming small
entity status. See Haden Schweitzer Corp. v. Arthur B. Myr Industries,
Inc., 901 F. Supp. 1235, 36 U.S.P.Q.2d 1020 (E.D. Mich. 1995) (failure to
pay maintenance fee in the correct amount results in intervening rights
under 35 U.S.C. 41(c)(2)); and (2) DH Technology, Inc. v. Synergstex
International, Inc., 937 F. Supp. 902, 40 U.S.P.Q.2d 1754 (N.D. Cal. 1996)
(failure to timely pay issue fee in the correct amount results in patent
lapse under 35 U.S.C. 151); but see Jewish Hospital of St. Louis v. Idexx
Laboratories, 951 F. Supp 1, 42 U.S.P.Q.2d 1720 (D. Me. 1996) (correction
of improper small entity fee payment in compliance with 37 CFR 1.28 does
not result in patent lapse). In light of the uncertainty that existed in
the mid-1990s concerning the consequences of erroneously claiming small
entity status, the Office advised applicants and patentees at that time
that they could avoid this uncertainty by not claiming small entity status
unless it is absolutely certain that the applicant or patentee is entitled
to small entity status (i.e., resolving any doubt, uncertainty, or lack of
information in favor of payment of the full fee). See Changes to Patent
Practice and Procedure, 62 FR 53131, 53135 (Oct. 10, 1997); see also DH
Technology, 937 F. Supp. at 910, 40 U.S.P.Q.2d at 1761 ("where there is the
slightest doubt about an applicant's entitlement to claim small entity

status, the applicant would be foolish not to pay the full * * * fee").
The U.S. Court of Appeals for the Federal Circuit (Federal Circuit),
however, reversed the District Court's decision in DH Technology and held
that an applicant may correct an erroneous payment of patent fees in the
small entity amount under 37 CFR 1.28 without penalty, such as patent
lapse, as long as small entity status was established in good faith and the
small entity fees were paid in good faith. See DH Tech. v. Synergystex
Int'l, 154 F.3d 1333, 1343, 47 U.S.P.Q.2d 1865, 1872 (Fed. Cir. 1998).
Thus, subsequent to the Federal Circuit's decision in DH Technology, the
only patent applicants or patentees who face negative legal consequences
from claiming or erroneously claiming small entity status are those
applicants who have no basis for making a good faith claim to small entity
status. Therefore, the USPTO does not believe that a significant number of
small entities currently decline to claim small entity status to avoid
negative legal consequences (i.e., the patent being invalidated) due to the
applicant claiming or erroneously claiming small entity status.
Finally, no party to the SBA Advocacy roundtable or other comment
suggested that the USPTO should use the business size standards set forth
in 13 CFR 121.201 for purposes of conducting an analysis or making a
certification under the Regulatory Flexibility Act for patent-related
regulations.
Comment 2: One comment requested clarification as to whether a license
to a non-small entity that arises only impliedly negates small entity
status for an applicant or patentee. The comment stated that the situation
of an implied license to a non-small entity frequently occurs when the
invention is embodied in software, and the software is mass-marketed under
a standard shrink-wrap license. The comment asserted that a shrink-wrap
agreement typically grants a "license" without indicating the intellectual
property rights for which the "license" is granted. The comment contended
that frequently the licensee cannot use the software without using the
patented invention and that the law often implies a license under these
circumstances. Additionally, the comment asserted that the current
definition of small business concern excludes any small entity that
licensed the invention to a non-small entity; however, the definition does
not limit the exclusion to only those small business concerns that
explicitly licensed the invention. Therefore, the comment suggested that
the USPTO adopt the following language: "(b) which has not assigned,
granted, conveyed, or explicitly licensed (and is under no obligation to do
so) any rights in the invention * * * ." Lastly, the comment averred that
some practitioners do not claim small entity status for software-embodied
inventions, even though the applicant or patentee is entitled to the
benefit of small entity status, because the applicant or patentee is
usually unaware if or when the mass-market software production is licensed
by a non-small entity.
Response: The scope of the term "license" in the context of entitlement
to small entity status was previously discussed in the SBA rule making to
define small entity for purposes of a reduction in patent fees for such a
small entity. Specifically, the SBA responded as follows:
Two comments raised questions about the intended scope of the term
"license." It was suggested that clarification is needed as to what is
included within the scope of the term. One comment suggested that, "[a]t
the very least, the record should reflect that the definition is not
intended to reach implied licenses to use and resell patented articles
purchased from a small business." The comment is correct insofar as it
suggests that such "implied licenses" are not intended to be included
within the scope of the term. Likewise, an order by the applicant to a firm
to build a proto-type machine or product for the applicant's own use is not
considered to constitute a license for purposes of the definition.
Another suggestion was that the regulation be reworded to deny small
business status where revenue above a certain dollar amount was received

from licensing rights under the invention to a concern which could not
qualify as a small entity. It was also suggested that the term "exclusive
license of any of the rights in the invention" be used instead of the term
"license." The latter two suggestions have not been adopted. Adoption of
these suggestions would cause the regulation to become more complicated,
and does not appear necessary to aid small concerns in accord with the
purposes of the legislation. In addition, it could substantially broaden
the number of concerns which could qualify with a resulting excessive loss
of revenue to the Patent and Trademark Office. It is not seen likely that
the restriction on licensing would unduly or adversely affect the ability
of the small business concern to participate in the patent system.
Definition of Small Business for Paying Reduced Patent Fees Under Title
35, United States Code, 47 FR 43272 (Sept. 30, 1982) (final rule). The
USPTO did not propose to change the definition of a small business concern
for the purpose of paying reduced patent fees. Rather, the USPTO was
inviting public comment on the establishment of the SBA business size
standard in 13 CFR 121.802 as the size standard when conducting an analysis
or making a certification under the Regulatory Flexibility Act for
patent-related regulations. Therefore, the suggested change is not adopted.
Comment 3: One comment suggested that part (b) of the SBA's definition
of a small business concern, specifying an entity "which has not assigned,
granted, conveyed or licensed * * * any rights in the invention" to a large
entity should be deleted from the definition as being inappropriate. The
comment stated that a license or other agreement between a small entity and
a large entity does not typically result in substantial income to the small
entity. The comment further asserted that in most cases the small entity
retains the financial responsibility to pay the patent prosecution and
maintenance fees, without any additional income from the large entity. The
comment contended that if the license or other agreement is later
terminated, the termination agreement often allows the large entity to
retain some rights without further payment. Additionally, the termination
agreement may be so complex that the small entity may not be able to
overcome a charge of inequitable conduct by a third party. Alternatively,
one of the comments stated that the adopted size standard does not unfairly
burden small entities because a large entity typically pays the cost of
patent prosecution when a small entity licenses its technology to the large
entity.
Response: 13 CFR 121.802 is the substantive provision for determining
whether an entity is a small business concern for purposes of paying
reduced patent fees. The USPTO did not propose to change the definition of
a small business concern for the purpose of paying reduced patent fees.
Rather, the USPTO was inviting public comment on the establishment of the
SBA business size standard in 13 CFR 121.802 as the size standard when
conducting an analysis or making a certification under the Regulatory
Flexibility Act for patent-related regulations.
Moreover, the suggestion was previously considered and rejected in the
rule making to implement the reduction in patent fees for small entities.
Specifically, a past comment suggested that 37 CFR 1.27 should be corrected
to indicate that a small business concern would be entitled to pay reduced
patent fees even though the small business concern may grant a
non-exclusive or an exclusive license to a non-small entity. The USPTO
responded as follows:
Section 1.27 requires that the concern qualify as a small business
concern as defined in Sec. 1.9(d). Section 1.9(d) defines a small business
concern by incorporating 13 CFR 121.3-18, which in turn defines a small
business concern as one not exceeding a particular size "which has not
assigned, granted, conveyed, or licensed, and is under no obligation under
contract or law to assign, grant, convey or license, any rights in the
invention to any person who could not be classified as an independent
inventor if that person had made the invention, or to any concern which
would not qualify as a small business concern or a nonprofit organization

under this section." The intent of both 13 CFR 121.3-18 and 37 CFR 1.9(d)
and 1.27(c) is to limit the payment of reduced fees under section 41(a) and
(b) of Title 35, United States Code, to those situations in which all of
the rights in the invention are owned by small entities, i.e., independent
inventors, small business concerns, or nonprofit organizations. To do
otherwise would be clearly contrary to the intended purpose of the
legislation which contains no indication that fees are to be reduced in
circumstances where rights are owned by non-small entities. Adopting the
suggestion might, for example, permit a non-small entity to transfer
patent rights to a small business concern which would pay the reduced fees
and grant an exclusive license to the non-small entity.
Revision of Patent and Trademark Fees, 47 FR 43273 (Sept. 30, 1982)
(final rule). Therefore, the suggested change is not adopted.
Comment 4: One comment noted an error in the following text: "The SBA
Advocacy, however, has questioned whether the USPTO's size standard is
under-inclusive because it excludes any business concern that has assigned,
granted, conveyed, or licensed (and is under no obligation to do so)." The
comment suggested the following correction: "The SBA Advocacy, however, has
questioned whether the USPTO's size standard is under-inclusive because it
excludes any business concern that has assigned, granted, conveyed, or
licensed (or is under an obligation to do so)."
Response: The USPTO notes that the text at issue should have read: "The
SBA Advocacy, however, has questioned whether the USPTO's size standard is
under-inclusive because it excludes any business concern that has
assigned, granted, conveyed, or licensed (or is under an obligation to do
so) any rights in the invention to any person who made it and could not be
classified as an independent inventor, or to any concern which would not
qualify as a non-profit organization or a small business concern under [13
CFR 1.802]."
Establishment of a Definition of "Small Business Concern" for Purposes
of the USPTO Conducting an Analysis or Making a Certification under the
Regulatory Flexibility Act for Patent-Related Regulations: The Regulatory
Flexibility Act permits an agency head to establish, for purposes of
Regulatory Flexibility Act analysis and certification, one or more
definitions of "small business concern" that are appropriate to the
activities of the agency, after consultation with the Office of Advocacy of
the Small Business Administration and opportunity for public comment. See 5
U.S.C. 601(3) and 13 CFR 121.903(c). The USPTO consulted with SBA Advocacy
and published a request for comments on the establishment of a business
size standard (the SBA business size standard set forth in 13 CFR 121.802
for the purpose of paying reduced patent fees) for USPTO Regulatory
Flexibility Analysis for patent-related regulations. See Size Standard for
Purposes of United States Patent and Trademark Office Regulatory
Flexibility Analysis for Patent-Related Regulations, 71 FR at 38388-89,
1309 Off. Gaz. Pat. Office at 37-38. Therefore, the USPTO is establishing
the following definition of small business concern for purposes of the
USPTO conducting an analysis or making a certification under the Regulatory
Flexibility Act for patent-related regulations: A small business concern
for Regulatory Flexibility Act purposes for patent-related regulations is a
business or other concern that: (1) Meets the SBA's definition of a
"business concern or concern" set forth in 13 CFR 121.105; and (2) meets
the size standards set forth in 13 CFR 121.802 for the purpose of paying
reduced patent fees, namely, an entity: (a) Whose number of employees,
including affiliates, does not exceed 500 persons; and (b) which has not
assigned, granted, conveyed, or licensed (and is under no obligation to do
so) any rights in the invention to any person who made it and could not be
classified as an independent inventor, or to any concern which would not
qualify as a non-profit organization or a small business concern under this
definition.
November 9, 2006 JON W. DUDAS
Under Secretary of Commerce for
Intellectual Property and Director of the
United States Patent and Trademark Office
[1313 OG 60]